Trust: Human Nature and the Reconstitution of Social Order

Summary

In his bestselling The End of History and the Last Man, Francis Fukuyama argued that the end of the Cold War would also mean the beginning of a struggle for position in the rapidly emerging order of 21st-century capitalism. In Trust, a penetrating assessment of the emerging global economic order "after History," he explains the social principles of economic life and tells us what we need to know to win the coming struggle for world dominance.

Challenging orthodoxies of both the left and right, Fukuyama examines a wide range of national cultures in order to divine the underlying principles that foster social and economic prosperity. Insisting that we cannot divorce economic life from cultural life, he contends that in an era when social capital may be as important as physical capital, only those societies with a high degree of social trust will be able to create the flexible, large-scale business organizations that are needed to compete in the new global economy.

A brilliant study of the interconnectedness of economic life with cultural life, Trust is also an essential antidote to the increasing drift of American culture into extreme forms of individualism, which, if unchecked, will have dire consequences for the nation's economic health.

—Emile Durkheim The Division of Labor in Society A society composed of an infinite number of unorganized individuals, that a hypertrophied State is forced to oppress and contain, constitutes a veritable sociological monstrosity…. Moreover, the State is too remote from individuals; its relations with them too external and intermittent to penetrate deeply into individual consciences and socialize them within…. A nation can be maintained only if, between the State and the individual, there is interposed a whole series of secondary groups near enough to the individuals to attract them strongly in their sphere of action and drag them, in this way, into the general torrent of social life…. Occupational groups are suited to fill this role, and that is their destiny.

Alexis de Tocqueville, Democracy in America The art of association then becomes, as I have said before, the mother of action, studied and applied by all.

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CONTENTS

Preface

PART I

The Idea of Trust: The Improbable Power of Culture in the Making of Economic Society

1. On the Human Situation at the End of History

2. The Twenty Percent Solution

3. Scale and Trust

4. Languages of Good and Evil

5. The Social Virtues

6. The Art of Association Around the World

PART II

Low-Trust Societies and the Paradox of Family Values

7. Paths and Detours to Sociability

8. A Loose Tray of Sand

9. The Buddenbrooks Phenomenon

10. Italian Confucianism

11. Face-to-Face in France

12. Korea: The Chinese Company Within

PART III

High-Trust Societies and the Challenge of Sustaining Sociability

13. Friction-Free Economies

14. A Block of Granite

15. Sons and Strangers

16. Job of a Lifetime

17. The Money Clique

18. German Giants

19. Weber and Taylor

20. Trust in Teams

21. Insiders and Outsiders

22. The High-Trust Workplace

PART IV

American Society and the Crisis of Trust

23. Eagles Don’t Flock—or Do They?

24. Rugged Conformists

25. Blacks and Asians in America

26. The Vanishing Middle

PART V

Enriching Trust: Combining Traditional Culture and Modern Institutions in the Twenty-first Century

27. Late Developers

28. Returns to Scale

29. Many Miracles

30. After the End of Social Engineering

31. The Spiritualization of Economic Life

Notes

Bibliography

Index

PREFACE

When Alexander Kojève, the twentieth century’s preeminent interpreter of Hegel, concluded at mid-century that the latter was essentially correct in declaring that history had ended, he decided as well that philosophers like himself had no further useful work to do. Relegating the study of philosophy to weekends, he became a fulltime bureaucrat in the Commission of the newly formed European Economic Community, where he remained until his death in 1968. In the light of this progression, it seemed only natural that I also should follow my own The End of History and the Last Man with a book about economics.

It seems to me that the emphasis on economics is almost inevitable. There has, of course, been a great deal of Sturm und Drang following the collapse of communism, with apparent instability and much pessimism in Europe concerning that continent’s political prospects. But virtually all political questions today revolve around economic ones; security problems themselves are shaped by issues welling up from within fragile civil societies, East and West. But economics is not what it appears to be either; it is grounded in social life and cannot be understood separately from the larger question of how modern societies organize themselves. It is the arena in which modern recognition struggles play themselves out. This book, then, is not a cookbook in the competitiveness genre, explaining how to create a winning economy or how Americans ought to imitate the Japanese or Germans. It is, rather, the story of how economic life reflects, shapes, and underpins modern life itself.

A study that tries to compare and contrast different cultures with respect to economic performance is an open invitation to insult virtually everyone it touches upon. I have covered a great deal of ground in this book, and I am sure that people more knowledgeable than I about the particular societies under discussion will be able to think of countless objections, exceptions, and contradictory pieces of evidence to the different generalizations contained here. To those who feel I have misunderstood their culture or, worse yet, said something slighting or belittling about it, I apologize in advance.

I owe a debt of gratitude to many people. Three editors influenced the book greatly: Erwin Glikes, who signed the book prior to his untimely death in 1994; Adam Bellow of the Free Press, who saw it to completion; and Peter Dougherty, who labored long hours to put the manuscript into final shape. I also thank, for their help at various points along the way, Michael Novak, Peter Berger, Seymour Martin Lipset, Amitai Etzioni, Ezra Vogel, Atsushi Seike, Chie Nakane, Takeshi Ishida, Noritake Kobayashi, Saburo Shiroyama, Steven Rhoads, Reiko Kinoshita, Mancur Olson, Michael Kennedy, Henry S. Rowen, Clare Wolfowitz, Robert D. Putnam, George Holmgren, Lawrence Harrison, David Hale, Wellington K. K. Chan, Kongdan Oh, Richard Rosecrance, Bruce Porter, Mark Cordover, Jonathan Pollack, Michael Swaine, Aaron Friedberg, Tamara Hareven, and Michael Mochizuki. Abram Shulsky, as usual, contributed greatly to the book’s conceptualization.

Once again, I am grateful to James Thomson and the RAND Corporation, which tolerated my presence as I was writing this book. I owe a long-standing debt of gratitude to my literary agents, Esther Newberg and Heather Schroder, who made both this and the volume that preceded it possible. Much of the material covered in this book would never have come to my attention but for the hard work of my research assistants, Denise Quigley, Tenzing Donyo, and especially Chris Swenson, who was of invaluable assistance through all phases of this study.

My wife, Laura, to whom the book is dedicated, has always been a careful reader and critic, and helped enormously. She was a source of great support throughout this effort.

Yoshia Fukuyama, my father, was a sociologist of religion, and passed down to me several years ago his library of social science classics. After resisting this perspective for many years, I think I now more fully understand his own interest in it. He read and commented on the manuscript, but passed away before the book could be published. I hope he understood how much his own life’s interests are reflected here.

As previously, in lieu of thanks to a typist, I must express gratitude to all of those ever-curious and inventive tinkerers and designers—many of them immigrants—who made possible all of the software, computers, and networking equipment on which production of this book depended.

I THE IDEA OF TRUST

The Improbable Power of Culture in the Making of Economic Society

CHAPTER I On the Human Situation at the End of History

As we approach the twenty-first century, a remarkable convergence of political and economic institutions has taken place around the world. Earlier in this century, deep ideological cleavages divided the world’s societies. Monarchy, fascism, liberal democracy, and communism were bitter competitors for political supremacy, while different countries chose the divergent economic paths of protectionism, corporatism, the free market, and socialist centralized planning. Today virtually all advanced countries have adopted, or are trying to adopt, liberal democratic political institutions, and a great number have simultaneously moved in the direction of market-oriented economies and integration into the global capitalist division of labor.

As I have argued elsewhere, this movement constitutes an end of history, in the Marxist-Hegelian sense of History as a broad evolution of human societies advancing toward a final goal.¹ As modern technology unfolds, it shapes national economies in a coherent fashion, interlocking them in a vast global economy. The increasing complexity and information intensity of modern life at the same time renders centralized economic planning extremely difficult. The enormous prosperity created by technology-driven capitalism, in turn, serves as an incubator for a liberal regime of universal and equal rights, in which the struggle for recognition of human dignity culminates. While many countries have had trouble creating the institutions of democracy and free markets, and others, especially in parts of the former communist world, have slid backward into fascism or anarchy, the world’s advanced countries have no alternative model of political and economic organization other than democratic capitalism to which they can aspire.

This convergence of institutions around the model of democratic capitalism, however, has not meant an end to society’s challenges. Within a given institutional framework, societies can be richer or poorer, or have more or less satisfying social and spiritual lives. But a corollary to the convergence of institutions at the end of history is the widespread acknowledgment that in postindustrial societies, further improvements cannot be achieved through ambitious social engineering. We no longer have realistic hopes that we can create a great society through large government programs. The Clinton administration’s difficulties in promoting health care reform in 1994 indicated that Americans remained skeptical about the workability of large-scale government management of an important sector of their economy. In Europe, almost no one argues that the continent’s major concerns today, such as a high continuing rate of unemployment or immigration, can be fixed through expansion of the welfare state. If anything, the reform agenda consists of cutting back the welfare state to make European industry more competitive on a global basis. Even Keynesian deficit spending, once widely used by industrial democracies after the Great Depression to manage the business cycle, is today regarded by most economists as self-defeating in the long run. These days, the highest ambition of most governments in their macroeconomic policy is to do no harm, by ensuring a stable money supply and controlling large budget deficits.

Today, having abandoned the promise of social engineering, virtually all serious observers understand that liberal political and economic institutions depend on a healthy and dynamic civil society for their vitality.² Civil society—a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches—builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.

A strong and stable family structure and durable social institutions cannot be legislated into existence the way a government can create a central bank or an army. A thriving civil society depends on a people’s habits, customs, and ethics—attributes that can be shaped only indirectly through conscious political action and must otherwise be nourished through an increased awareness and respect for culture.

Beyond the boundaries of specific nations, this heightened significance of culture extends into the realms of the global economy and international order. Indeed, one of the ironies of the convergence of larger institutions since the end of the cold war is that people around the world are now even more conscious of the cultural differences that separate them. For example, over the past decade, Americans have become much more aware of the fact that Japan, an erstwhile member of the free world during the cold war, practices both democracy and capitalism according to a different set of cultural norms than does the United States. These differences have led to considerable friction at times, as when the members of a Japanese business network known as a keiretsu buy from one another rather than from a foreign company that might offer better price or quality. For their part, many Asians are troubled by certain aspects of American culture, such as its litigiousness and the readiness of Americans to insist upon their individual rights at the expense of the greater good. Increasingly, Asians point to superior aspects of their own cultural inheritance, such as deference to authority, emphasis on education, and family values, as sources of social vitality.³

The increasing salience of culture in the global order is such that Samuel Huntington has argued that the world is moving into a period of civilizational clash, in which the primary identification of people will not be ideological, as during the cold war, but cultural.⁴ Accordingly, conflict is likely to arise not among fascism, socialism, and democracy but among the world’s major cultural groups: Western, Islamic, Confucian, Japanese, Hindu, and so on.

Huntington is clearly correct that cultural differences will loom larger from now on and that all societies will have to pay more attention to culture as they deal not only with internal problems but with the outside world. Where Huntington’s argument is less convincing, however, is that cultural differences will necessarily be the source of conflict. On the contrary, the rivalry arising from the interaction of different cultures can frequently lead to creative change, and there are numerous cases of such cultural cross-stimulation. Japan’s confrontation with Western culture after the arrival of Commodore Perry’s black ships in 1853 paved the way for the Meiji Restoration and Japan’s subsequent industrialization. In the past generation, techniques like lean manufacturing—the process of eliminating buffers from the manufacturing process to facilitate feedback from the factory floor—have made their way from Japan to the United States, to the latter’s benefit. Whether the confrontation of cultures leads to conflict or to adaptation and progress, it is now vitally important to develop a deeper understanding of what makes these cultures distinctive and functional, since the issues surrounding international competition, political and economic, increasingly will be cast in cultural terms.

Perhaps the most crucial area of modern life in which culture exercises a direct influence on domestic well-being and international order is the economy. Although economic activity is inextricably linked with social and political life, there is a mistaken tendency, encouraged by contemporary economic discourse, to regard the economy as a facet of life with its own laws, separate from the rest of society. Seen this way, the economy is a realm in which individuals come together only to satisfy their selfish needs and desires before retreating back into their real social lives. But in any modern society, the economy constitutes one of the most fundamental and dynamic arenas of human sociability. There is scarcely any form of economic activity, from running a dry-cleaning business to fabricating large-scale integrated circuits, that does not require the social collaboration of human beings. And while people work in organizations to satisfy their individual needs, the workplace also draws people out of their private lives and connects them to a wider social world. That connectedness is not just a means to the end of earning a paycheck but an important end of human life itself. For just as people are selfish, a side of the human personality craves being part of larger communities. Human beings feel an acute sense of unease—what Emile Durkheim labeled anomie—in the absence of norms and rules binding them to others, an unease that the modern workplace serves to moderate and overcome.⁵

The satisfaction we derive from being connected to others in the workplace grows out of a fundamental human desire for recognition. As I argued in The End of History and the Last Man, every human being seeks to have his or her dignity recognized (i.e., evaluated at its proper worth) by other human beings. Indeed, this drive is so deep and fundamental that it is one of the chief motors of the entire human historical process. In earlier periods, this desire for recognition played itself out in the military arena as kings and princes fought bloody battles with one another for primacy. In modern times, this struggle for recognition has shifted from the military to the economic realm, where it has the socially beneficial effect of creating rather than destroying wealth. Beyond subsistence levels, economic activity is frequently undertaken for the sake of recognition rather than merely as a means of satisfying natural material needs.⁶ The latter are, as Adam Smith pointed out, few in number and relatively easily satisfied. Work and money are much more important as sources of identity, status, and dignity, whether one has created a multinational media empire or been promoted to foreman. This kind of recognition cannot be achieved by individuals; it can come about only in a social context.

Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society. As this book will show, one of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society.

Consider the following vignettes from twentieth-century economic life:

During the oil crisis of the early 1970s, two automakers on opposite sides of the world, Mazda and Daimler-Benz (maker of Mercedes Benz luxury cars), were both hit with declining sales and the prospect of bankruptcy. In both cases, they were bailed instances of out by a coalition of companies with which they had traditionally done business, led by a large bank: Sumitomo Trust, in the instances of Mazda, and the Deutsche Bank, in the case of Daimler. In both cases, immediate profitability was sacrificed for the sake of saving the institution—in the German case, to prevent it from being bought out by a group of Arab investors.

The recession of 1983-1984 that ravaged America’s industrial heartland also hit the Nucor Corporation very hard. Nucor had just entered the steelmaking business by building mini-mills using a new German continuous-casting technology. Its mills were built in places like Crawfordsville, Indiana, outside the traditional rust belt, and were operated by nonunionized workers, many of them former farmers. To deal with the drop in revenues, Nucor put its employees—from the CEO to the lowliest maintenance worker—on a two- or three-day workweek, with a corresponding cut in pay. No workers were fired, however, and when the economy and the company recovered, it enjoyed a tremendous esprit de corps that contributed to its becoming a major force in the American steel industry.⁷

In the Toyota Motor Company’s Takaoka assembly plant, any of the thousands of assembly line workers who work there can bring the entire plant to a halt by pulling on a cord at his or her workstation. They seldom do. By contrast, workers at the great Ford auto plants like Highland Park or River Rouge—plants that virtually defined the nature of modern industrial production for three generations—were never trusted with this kind of power. Today, Ford workers, having adopted Japanese techniques, are trusted with similar powers, and have greater control over their workplace and machines.

In Germany, shop foremen on the floor of a typical factory know how to do the jobs of those who work under them and frequentlytake their place if the need arises. The foreman can move workers from one job to another and evaluates them based on face-to-face dealings. There is great flexibility in promotion: a blue-collar worker can obtain credentials as an engineer by attending an extensive in-company training program rather than going to a university.

The common thread that runs through these four apparently unrelated vignettes is that in each case, economic actors supported one another because they believed that they formed a community based on mutual trust. The banks and suppliers that engineered the Mazda and DaimlerBenz rescues felt an obligation to support these auto companies because the latter had supported them in the past and would do so again in the future. In the German case, moreover, there was a nationalistic feeling that such an important trademark German name as Mercedes-Benz should not fall into non-German hands. Workers at Nucor were willing to accept severe cuts in their weekly pay because they believed that the managers who devised the pay cut plan were hurting as well and were committed to not laying them off. The workers at the Toyota plant were given immense power to stop the entire assembly line because management trusted them not to abuse that power, and they repaid this trust by using that power responsibly to improve the line’s overall productivity. Finally, the workplace in Germany is flexible and egalitarian because workers trust their managers and fellow workers to a higher degree than in other European countries.

The community in each of these cases was a cultural one, formed not on the basis of explicit rules and regulations but out of a set of ethical habits and reciprocal moral obligations internalized by each of the community’s members. These rules or habits gave members of the community grounds for trusting one another. Decisions to support the community were not based on narrow economic self-interest. The Nucor management could have decided to award themselves bonuses while laying off workers, as many other American corporations did at the time, and Sumitomo Trust and Deutsche Bank could perhaps have maximized their profits by selling off their failing assets. Solidarity within the economic community in question may have had beneficial consequences over the long run for the bottom line; certainly Nucor’s workers were motivated to give their company an extra measure of effort once the recession was over, as was the German foreman whose company helped him to become an engineer. But the reason that these economic actors behaved as they did was not necessarily because they had calculated these economic consequences in advance; rather, solidarity within their economic community had become an end in itself. Each was motivated, in other words, by something broader than individual self-interest. As we will see, in all successful economic societies these communities are united by trust.

By contrast, consider situations in which the absence of trust has led to poor economic performance and its attendant social implications:

In a small town in southern Italy during the 1950s, Edward Banfield noted that the wealthy citizens were unwilling to come together to found either a school or hospital, which the town needed badly, or to build a factory, despite an abundance of capital and labor, because they believed it was the obligation of the state to undertake such activities.

In contrast to German practice, the French shop foreman’s relations with his or her workers are regulated by a thicket of rules established by a ministry in Paris. This comes about because the French tend not to trust superiors to make honest personal evaluations of their workers. The formal rules prevent the foreman from moving workers from one job to another, inhibiting development of a sense of workplace solidarity and making very difficult the introduction of innovations like the Japanese lean manufacturing system.

Small businesses in American inner cities are seldom owned by AfricanAmericans; they tend to be controlled by other ethnic groups, like the Jews earlier in this century and Koreans today. One reason is an absence of strong community and mutual trust among the contemporary AfricanAmerican underclass. Korean businesses are organized around stable families and benefit from rotating credit associations within the broader ethnnic community; inner-city African-American families are weak and credit associations virtually nonexistent.

These three cases reveal the absence of a proclivity for community that inhibits people from exploiting economic opportunities that are available to them. The problem is one of a deficit of what the sociologist James Coleman has called social capital: the ability of people to work together for common purposes in groups and organizations.⁸ The concept of human capital, widely used and understood among economists, starts from the premise that capital today is embodied less in land, factories, tools, and machines than, increasingly, in the knowledge and skills of human beings.⁹ Coleman argued that in addition to skills and knowledge, a distinct portion of human capital has to do with people’s ability to associate with each other, that is critical not only to economic life but to virtually every other aspect of social existence as well. The ability to associate depends, in turn, on the degree to which communities share norms and values and are able to subordinate individual interests to those of larger groups. Out of such shared values comes trust, and trust, as we will see, has a large and measurable economic value.

With regard to the ability to form spontaneous communities such as those detailed above, the United States has had more in common with Japan and Germany than any of these three has with Chinese societies like Hong Kong and Taiwan, on the one hand, and Italy and France on the other. The United States, like Japan and Germany, has historically been a high-trust, group-oriented society, despite the fact that Americans believe themselves to be rugged individualists.

But the United States has been changing rather dramatically over the past couple of generations with respect to its art of association. In many ways, American society is becoming as individualistic as Americans have always believed it was: the inherent tendency of rights-based liberalism to expand and multiply those rights against the authority of virtually all existing communities has been pushed toward its logical conclusion. The decline of trust and sociability in the United States is also evident in any number of changes in American society: the rise of violent crime and civil litigation; the breakdown of family structure; the decline of a wide range of intermediate social structures like neighborhoods, churches, unions, clubs, and charities; and the general sense among Americans of a lack of shared values and community with those around them.

This decline of sociability has important implications for American democracy, perhaps even more so than for the economy. Already the United States pays significantly more than other industrialized countries for police protection and keeps more than 1 percent of its total population in prison. The United States also pays substantially more than does Europe or Japan to its lawyers, so that its citizens can sue one another. Both of these costs, which amount to a measurable percentage of gross domestic product annually, constitute a direct tax imposed by the breakdown of trust in the society. In the future, the economic effects may be more farreaching; the ability of Americans to start and work within a wide variety of new organizations may begin to deteriorate as its very diversity lowers trust and creates new barriers to cooperation. In addition to its physical capital, the United States has been living off a fund of social capital. Just as its savings rate has been too low to replace physical plant and infrastructure adequately, so its replenishment of social capital has lagged in recent decades. The accumulation of social capital, however, is a complicated and in many ways mysterious cultural process. While governments can enact policies that have the effect of depleting social capital, they have great difficulties understanding how to build it up again.

The liberal democracy that emerges at the end of history is therefore not entirely modern. If the institutions of democracy and capitalism are to work properly, they must coexist with certain premodern cultural habits that ensure their proper functioning. Law, contract, and economic rationality provide a necessary but not sufficient basis for both the stability and prosperity of postindustrial societies; they must as well be leavened with reciprocity, moral obligation, duty toward community, and trust, which are based in habit rather than rational calculation. The latter are not anachronisms in a modern society but rather the sine qua non of the latter’s success.

The American problem starts with a failure of Americans to perceive their own society, and its historical communitarian orientation, correctly. Part I addresses this failure, beginning with a discussion of why recent arguments among certain thinkers miss a critical point about the cultural dimension of economic life. The remainder of this part will define more precisely what is meant by culture, trust, and social capital. It will explain how trust is related to industrial structure and the creation of those largescale organizations vital to economic well-being and competitiveness.

Parts II and III deal with two major bridges to sociability, the family and nonkinship-based communities, respectively. There are four familistic societies detailed in part II: China, France, Italy, and South Korea. In each, the family constitutes the basic unit of economic organization; each has experienced difficulties in creating large organizations that go beyond the family, and in each, consequently, the state has had to step in to promote durable, globally competitive firms. Part III examines Japan and Germany, both high-trust societies, which, in contrast to the familistic societies of part II, have had a much easier time spawning large-scale firms not based on kinship. Not only did such societies move early to modern professional management, but they have been able to create more efficient and satisfying workplace relationships on the factory floor. Lean manufacturing, invented by the Toyota Motor Corporation, will be considered as one example of the organizational innovations possible in a high-trust society.

Part IV discusses the complicated problem of where to locate the United States in the spectrum of low- and high-trust societies. Where the American art of association came from, and why it has been weakening, are the chief issues taken up in this part of the book. Finally, part V will draw some general conclusions concerning the future of global society and the role of economic life in the broader scope of human activity.

CHAPTER 2 The Twenty Percent Solution

Over the past generation, economic thought has been dominated by neoclassical or free market economists, associated with names like Milton Friedman, Gary Becker, and George Stigler. The rise of the neoclassical perspective constitutes a vast improvement from earlier decades in this century, when Marxists and Keynesians held sway. We can think of neoclassical economics as being, say, eighty percent correct: it has uncovered important truths about the nature of money and markets because its fundamental model of rational, self-interested human behavior is correct about eighty percent of the time. But there is a missing twenty percent of human behavior about which neoclassical economics can give only a poor account. As Adam Smith well understood, economic life is deeply embedded in social life, and it cannot be understood apart from the customs, morals, and habits of the society in which it occurs. In short, it cannot be divorced from culture.¹

Consequently, we have been ill served by contemporary economic debates that fail to take account of these cultural factors. An example is the argument that has taken place in the United States between free market economists and the so-called neomercantilists over the past decade. Proponents of the latter perspective—including people like Chalmers Johnson, James Fallows, Clyde Prestowitz, John Zysman, Karl van Wolferen, Alice Amsden, and Laura Tyson—have argued that the dynamic and fastgrowing economies of East Asia have succeeded not by following but by violating the rules of neoclassical economics.² The Asian fast developers have achieved such astoundingly high growth rates, the neomercantilists argue, not because of the untrammeled working of free markets but because governments in each case stepped in to promote development through industrial policies. For all of their awareness of the distinctiveness of Asia, however, many neomercantilists argue their policy conclusions in the same abstract and universal terms as the neoclassical economists. They argue that Asia is different not because of culture, but because societies there, reacting to their situation as late developers trying to catch up to Europe and North America, chose a different set of economic institutions. This fails, however, to take into account the degree to which the ability to create certain institutions and run them effectively is itself culture bound.

James Fallows has made perhaps the most sweeping indictment of neoclassical economics in his book, Looking at the Sun.³ Fallows argues that the Anglo-American preoccupation with market-oriented economics has blinded Americans to the critical role played by governments and that much of the world outside the United States operates on assumptions very much at variance with the rules of neoclassical economics. Asian governments, for example, have protected domestic industries through enacting high tariffs, restricting foreign investment, promoting exports through cheap credits or outright subsidies, granting licenses to favored companies, organizing cartels to share research and development costs and to allocate market shares, or else funding cutting-edge R&D directly.⁴ Chalmers Johnson was one of the first to argue that it was Japan’s Ministry of International Trade and Industry (MITI) rather than the market that was responsible for guiding the postwar Japanese economy to its extraordinarily high growth rates. Virtually all neomercantilists have charged that the United States has fallen behind in the economic competition with Japan and other Asian states because the free market orientation of successive U.S. administrations has allowed key industries to fall victim to foreign competition. They have promoted the American equivalent of a MITI that would subsidize, coordinate, and otherwise promote American high-tech industries in the global marketplace, and argued for a far more confrontational trade policy that would protect American industries faced with unfair foreign competitors.

The debate the neomercantilists have stirred up has centered on whether industrial policies were in fact responsible for Asia’s high rates of growth and whether governments are capable of guiding economic development better than markets.⁵ The neomercantilists, however, neglect the role of culture in shaping industrial policy itself. For even if we accept the hypothesis that the wise guidance of technocrats was responsible for Asian progress, it is clear that there are sharp differences in the relative capabilities of states to plan and carry out industrial policies. These differences are shaped by culture, as well as by the nature of political institutions and historical circumstances of different countries. The French and Japanese have long statist traditions, while the United States has an equally long history of antistatism, and there is a world of difference in the training and general quality of human beings that go into their respective national bureaucracies. That there is a great difference in the quality of policies and management that result should not be surprising.

There are also clearly major cultural differences with respect to the nature and prevalence of corruption. One of the chief problems with any industrial policy is that it invites the corruption of public officials, which in turn vitiates any possible beneficial effects of the policy. Clearly industrial policies work better in societies with long traditions of honest and competent civil service. Although the corruption of Japanese politicians has become a national scandal, few accusations of a similar nature have ever been leveled against MITI or Finance Ministry bureaucrats. The same is very unlikely to be the case with bureaucrats in Latin America, not to speak of other parts of the Third World.

Other cultural considerations are likely to affect the success of an industrial policy as well. Attitudes toward authority in Asia may have helped countries there implement industrial policies in ways that would not be possible elsewhere in the world. Consider the question of government help for sunrise versus sunset industries. It may be possible in theory for technocrats in countries not at the leading edge of technology to pick industries or sectors for promotion, but political factors usually intervene to skew government policy in the wrong direction. By definition, sunrise industries do not yet exist and therefore have no interest groups promoting them. Sunset industries, on the other hand, are often big employers and usually have vocal and politically powerful proponents. One of the distinctive features of the industrial policies carried out by many Asian governments has been their ability to dismantle older industries with large numbers of employees in an orderly way. In Japan, for example, employment in the textile industry fell from 1.2 million to 655,000 between the early 1960s and 1981, employment in the coal industry sank from 407,000 to 31,000 between 1950 and 1981, and shipbuilding underwent a similarly dramatic reduction in the 1970s.⁶ In each case, the state intervened not to prop up employment in these sectors but to assist in their demise. Governments in Taiwan and South Korea have presided over similar reductions in employment in older labor-intensive industries.

In Europe and Latin America, by contrast, governments have found it almost impossible politically to dismantle sunset industries. Rather than helping to accelerate their decline, European governments nationalized failing industries like coal, steel, and automobiles, in the vain hope that state subsidies would make them internationally competitive. While paying lip-service to the need to shift resources into more modern sectors, the very democratic character of European governments led them to give in to political pressures to direct government subsidies to older industries, often at tremendous cost to taxpayers. There is no doubt that something similar would happen in the United States if the government got into the business of handing out competitiveness subsidies. Congress, responding to interest group pressure, could be relied on to declare that industries like shoes and textiles, rather than aerospace and semiconductors, were strategic and thus worthy of government subsidization. Even in the high-tech area, older technologies are likely to carry more political clout than ones under development. Thus, the most compelling argument against an industrial policy for the United States is not an economic one at all but is related to the character of American democracy.

As this book will show, the significance of the state sector varies enormously by culture. In familistic societies such as China or Italy, state intervention is often the only avenue by which a nation can build large-scale industries and is therefore relatively important if the country is to play in global economic sectors demanding large scale. On the other hand, societies with a high degree of trust and social capital like Japan and Germany can create large organizations without state support. In other words, in calculating comparative advantage, economists need to take into account relative endowments of social capital, as well as more conventional forms of capital and resources. When there is a deficit in social capital, the short-fall can often be made good by the state, just as the state can rectify a deficit in human capital by building more schools and universities. But the need for state intervention will depend very much on the particular culture and social structure of the society over which it presides.

The other pole of the current industrial policy debate is represented by neoclassical economists, who today dominate the economics profession. Neoclassical economics is a far more serious and sustained intellectual enterprise than neomercantilism. Substantial empirical evidence confirms that markets are indeed efficient allocators of resources and that giving free rein to self-interest promotes growth. The edifice of free market economics is, to repeat, about eighty percent right, which is not bad for a social science and substantially better than its rivals as the basis for public policy.

But the totality of the intellectual victory of free market economic theory in recent years has been accompanied by a considerable degree of hubris. Not being content to rest on their laurels, many neoclassical economists have come to believe that the economic method they have discovered provides them with the tools for constructing something approaching a universal science of man. The laws of economics, they argue, apply everywhere: they are equally valid in Russia as the United States, Japan, Burundi, or the Papua New Guinea highlands, and do not admit significant cultural variations in their application. These economists believe that they are right in a deeper epistemological sense as well: through their economic methodology, they have unlocked a fundamental truth about human nature that will allow them to explain virtually all aspects of human behavior. Two of the most prolific and renowned contemporary neoclassical economists, Gary Becker of the University of Chicago and James Buchanan of George Mason University (both of whom won Nobel Prizes for their work), have built careers extending economic methodology to what are usually regarded as noneconomic phenomena like politics, bureaucracy, racism, the family, and fertility.⁷ The political science departments of many major universities are now filled with followers of socalled rational choice theory, which attempts to explain politics using an essentially economic methodology.⁸

The problem with neoclassical economics is that it has forgotten certain key foundations on which classical economics was based. Adam Smith, the premier classical economist, believed that people are driven by a selfish desire to better their condition, but he would never have subscribed to the notion that economic activity could be reduced to rational utility maximization. Indeed, his other major work besides The Wealth of Nations was The Theory of Moral Sentiments, which portrays economic motivation as highly complex and embedded in broader social habits and mores. The very change in the name of the discipline from political economy to economics between the eighteenth and late nineteenth centuries reflects the narrowing of the model of human behavior at its core. Current economic discourse needs to recover some of the richness of classical, as opposed to neoclassical, economics, by taking account of how culture shapes all aspects of human behavior, including economic behavior, in a number of critical ways. Not only is the neoclassical economic perspective insufficient to explain political life, with its dominant emotions of indignation, pride, and shame, but it is not sufficient to explain many aspects of economic life either.⁹ Not all economic action arises out of what are traditionally thought of as economic motives.

The entire imposing edifice of contemporary neoclassical economic theory rests on a relatively simple model of human nature: that human beings are rational utility-maximizing individuals. That is, human beings seek to acquire the largest possible amount of the things they think are useful to themselves, they do this in a rational way, and they make these calculations as individuals seeking to maximize the benefit to themselves before they seek the benefit of any of the larger groups of which they are part. In short, neoclassical economics postulates that human beings are essentially rational but selfish individuals who seek to maximize their material well-being.¹⁰ Economists, to a much greater extent than philosophers, poets, clergy, or politicians, preach the virtues of the pursuit of narrow self-interest because they believe that the greatest good to society as a whole can be achieved by allowing these individuals to pursue their self-interest through the market. In one social experiment, a large group of people at a university were given tokens that they could exchange for money that they would receive personally or for money that the group as a whole would have to share. It turned out that between forty and sixty percent of those in the experiment contributed altruistically to the group’s well-being. The only exception was a group of entering graduate students in economics.¹¹ In the words of one economist, The first principle of Economics is that every agent is actuated only by self-interest.¹²

The power of neoclassical theory rests on the fact that its model of humanity is accurate a good deal of the time: people can indeed be relied on to pursue their own selfish interests more often than they pursue some kind of common good. Rational self-interested calculation transcends cultural borders. Every first-year economics student reads of studies that show that when the price of wheat goes up relative to corn, peasants shift their output from corn to wheat regardless of whether they live in China, France, India, or Iran.

But every one of the terms of the neoclassical premise that human beings are rational utility-maximizing individuals is subject to significant qualification or exception.¹³ Take the assertion that people pursue utility. The most basic definition of utility is the narrow one associated with the nineteenth-century utilitarian, Jeremy Bentham: that utility is the pursuit of pleasure or the avoidance of pain. Such a definition is straightforward and corresponds to a commonsense understanding of economic motivation: people want to be able to consume the largest possible quantity of the good things of life. But there are numerous occasions when people pursue goals other than utility.¹⁴ They have been known to run into burning houses to save others, die in battle, or throw away lucrative careers so that they can commune with nature somewhere in the mountains. People do not simply vote their pocketbooks: they also have ideas that certain things are just or unjust, and they make important choices accordingly.¹⁵ There would not be nearly as many wars if the latter were fought simply over economic resources; unfortunately, they usually involve nonutilitarian goals like recognition, religion, justice, prestige, and honor.

Some economists try to get around this problem by broadening the definition of utility beyond pleasure or money to take account of other motivations such as the psychic pleasure one receives for doing the right thing, or the pleasure people can take in other people’s consumption.¹⁶ Economists assert that one can know what is useful only by what people reveal to be useful by their choices—hence their concept of revealed preference.¹⁷ The abolitionist dying to end slavery and the investment banker speculating on interest rates are both said to be pursuing utility, the only difference being that the abolitionist’s utility is of a psychic sort. At its most extreme, utility becomes a purely formal concept used to describe whatever ends or preferences people pursue. But this type of formal definition of utility reduces the fundamental premise of economics to an assertion that people maximize whatever it is they choose to maximize, a tautology that robs the model of any interest or explanatory power. By contrast, to assert that people prefer their selfish material interests over other kinds of interests is to make a strong statement about human nature.

It should also be quite evident that people do not always pursue utility, however defined, in a rational way, that is, by considering available alternatives and choosing the one that maximizes utility in the long run. Indeed, it is possible to argue that people are usually not rational in this sense.¹⁸ The Chinese, Korean, and Italian preference for family, Japanese attitudes toward adoption of nonkin, the French reluctance to enter into face-to-face relationships, the German emphasis on training, the sectarian temper of American social life: all come about as the result not of rational calculation but from inherited ethical habit.

Most neoclassical economists would respond to these examples by saying that they are cases not of irrational behavior but of imperfect information. Information about relative prices and product quality is often unavailable or requires considerable time and effort to acquire. People will make seemingly irrational choices because the costs of acquiring better information outweigh the benefits they expect from it. It is not rational for people to be rational about every single choice they make in life; if this were true, their lives would be consumed in decisions over the smallest matters.¹⁹ People in traditional cultures will follow the dictates of tradition and act very differently from people in industrialized societies, but that is because traditional culture contains embedded rules of behavior that are rational for that culture.²⁰

But while habits can be economically rational or may once have had rational causes, many are not, or else take on a life of their own in situations when they are no longer appropriate. It may have been rational, in the context of traditional Chinese peasant society, to seek to have many sons, since sons are their elders’ only source of support. But why, then, does this preference persist when Chinese immigrate to the United States or Canada, which have state-sponsored social security systems? The French preference for centralized bureaucratic authority may have been a reasonable reaction to centralized absolutism, but why do the French continue to have such difficulties at self-organization even when contemporary central governments deliberately devolve power to them? It may be rational for a mother on welfare not to marry the father of her child, given the economic incentives established by the welfare system, but why does that habit persist even when the benefits are taken away, and in the light of the clear long-run economic disadvantages to single parenthood? It is impossible to maintain that all cultures embed rules that are totally rational in their own terms. The simple variety of cultures that exist in the world, and the enormous range of cultural adaptations to similar economic situations, suggest that not all of them can be equally rational.

Finally, it is very questionable whether human beings act as individual utility maximizers rather than seeing themselves as parts of larger social groups. In Mark Granovetter’s phrase, people are embedded in a variety of